Examination of Witnesses (Questions 40-59)
ROYAL MAIL
GROUP PLC
18 JULY 2006
Q40 Rob Marris: Perhaps you could
let us know if there is not one?
Mr Leighton: Absolutely.
Q41 Rob Marris: There must be a Memorandum
and Articles of Association?
Mr Leighton: There is for the
company. Whether it deals with whether you can talk to your people
and ask them things, I am not too sure. I think that is just commonsense,
good management.
Q42 Chairman: Would it be possible
to see a copy of the letter you sent to your staff about the scheme?
Mr Leighton: Absolutely.
Q43 Chairman: That would give us some
background information that some of would like to know about.
Mr Leighton: Absolutely. No problem.
Q44 Mr Binley: I am beginning to
lose touch with reality, quite frankly. I do not wish to trivialise
what is a very big business, but I am a businessman and it seems
like we are playing Monopoly. You have a situation where we have
found little evidence that employer share schemes incentive employees
to improve productivity. Only 37% of your employees have expressed
an interest in share ownership, there is no measure of normal
accountability that there would be in a business with a share
scheme and, finally, you are trading insolvently, because you
have got assets of £2 billion and you have got debts of £5
billion. This concerns me enormously. I do not like playing games
with a big thing like the Post Office, and I am sure you feel
uneasy too. Exactly how much factual evidence do you have that
your proposed model of employee share ownership would be advantageous
to the UK consumer, and, as Royal Mail is a public sector organisation,
how would your company's ultimate shareholders, the UK population,
be compensated in all these Ruritanian machinations?
Mr Leighton: Brilliant! That was
a hell of a speech. Two things. Number one, a lot of it is Monopoly
money, I think you are absolutely right, and your issue about
the assets of the business and the work of the business is absolutely
right too. You have to ask yourself: how did that happen? We inherited
this mess and our job is not to reflect on that, our job is to
put it right, and the whole issue about this investment case starts
to do that, and actually, touch wood, so far we never asked the
great British public for anything in this process. Along the way,
which has been a very painful process for the people in the company,
it is worth reminding everybody that this business, which is the
way we tend to look at it, has just delivered, in very difficult
circumstances, the best quality of service ever in the history
of the Royal Mail and the best profit ever delivered in the history
of the Royal Mail. That is something to be applauded, not something
to be jumped up and down about and trivialised, because to do
that in this market with that amount of people in the circumstances
we have got is a pretty significant achievement.
Q45 Mr Binley: Profit and stable
business are two different things. I understand where you have
been, and we applaud that, but my question still remains relevant
without that sort of comment, quite frankly.
Mr Leighton: But it is a very
important comment, because when you talk about Ruritania and Monopoly,
all I am saying is that this is a serious business, it does serious
work, employs lots of people and actually the majority of those
people do a fantastic piece of work, and this business, the Royal
Mail, is still the envy of most of the postal services of the
world. The fact that it has got to where it is is one hell of
an achievement. What we are talking about now is how do you move
on, and how do you move on in an environment where no longer are
we a monopoly? Even when we were a monopoly and we could determine
exactly what our revenue was, we could not make money. If you
cannot make money when you can determine exactly what your revenue
is, you have got a pretty big problem down the track.
Q46 Mr Binley: Can I remind you of
the two questions I asked you?
Mr Leighton: Yes. We can give
you empirical evidence that shares for employees works. That was
part of our submission. We will give you that with pleasure.
Q47 Chairman: Shares traded on the
stock exchange, no doubt at all. This model is what the question
is.
Mr Leighton: And we have got stuff
that can demonstrate on this model. The other way to look at it
is, like us or not, we have got some experience in running companies,
and generally a pretty good track record in running companies,
and actually, so far, a pretty good track record in running this
company, and to a degree that should count. We are not in the
game of doing things just because we think it is a good idea.
We are in the game of doing things because it is part of an overall
investment case that says: if you do all of these things, if you
modernise, if you put more efficiency in, if you invest back into
the business, if we involve people in the company and (the way
I think about it is a rhetorical question really) do you believe
that people participate more and do more and actually feel more
for an organisation where they own part of it? My view is that
it is exactly same as every individual around this table. Stuff
that we own or that we part own plays more of a part in our lives,
and so the empirical evidence happens in every day of every man
and every woman in the street, so a lot of it is commonsense.
Q48 Mr Binley: You did congratulate
me on my speech. I congratulate you on yours. That was pretty
good too. Can I come back to this final point that you did not
touch on. How would your company's ultimate shareholders, the
UK population, be compensated? How do you see that connect, bearing
in mind there is no direct accountability in terms of what a normal
company would classify as accountability?
Mr Crozier: You also touched on
the need for a stable company. Most of the issues that face the
Royal Mail are actually issues of legacy. The three most synonymous
ones are the pension deficit itself, which is clearly huge the
fact that the company has not been invested in for the last 20
or 30 years, which means therefore it is completely unmodernised
compared to all our competitors and, thirdly, the fact that government
income into the Post Office will have gone from 60% of the Post
Office's income four or five years ago to less than 10% in a couple
of years' time. So we are dealing with three huge legacy issues
plus the future one of an open competitive market. So, although
the companies perform very well today, it has got those issues
to cope with. Clearly, in part of the investment case, the taxpayer
ought to be saying, "We are quite prepared to stand behind
the Royal Mail and to invest some money, but if we are going to
do that, we want to make sure it is going to work." That
is the important thing. If you put money in, it works and you
get a return and you get a great quality of service. The share
scheme is all about motivating our people, taking our people with
us so that we can go on this journey together and make this work.
The end benefits to the taxpayers are that, as we get more efficient,
we give them better value in the sense of (1) more cost-effective
prices, (2) better quality of service and (3) eventually returning
to a position, like a normal company, where we give our shareholder
a dividend based on our performance, and that has got to be good
for the taxpayer because it means we are putting something back
into the economy. If you go back three years when we were losing
£1.7 billion over two years, that is when the taxpayer should
have been very upset because the Royal Mail was an absolute drain
on the taxpayer. So, that is what they get out of it. Over time,
as we become more efficient, they get a modern Royal Mail which
is absolutely vital to every business in this country who relies
on us, because we are the link with their customer, every household
that relies on us, and over time, as we get more efficient, they
get better prices, they get better quality of service and we start
to put something back in. That is the plan and the thinking.
Q49 Mr Weir: I have listened carefully
to what you have said, and it all seems very nice, but taking
the optimistic scenario of your success where the Royal Mail becomes
highly successful, do you not feel that under this model you are
going to face increasing pressure from your employee shareholders
to make the shares fully tradable? Do you not think that in the
end it will be privatisation through the back door?
Mr Crozier: Absolutely not, because
as far as they are concerned they are fully tradable, they are
just fully tradable within the Royal Mail, so there is no need
or requirement for them to wish to go outside it.
Q50 Mr Weir: If the company becomes
highly successful, presumably the shares would have a tradable
value which may be greater outwith the small group that can trade
them, and so there will be pressure building up to make them tradable
on the London markets?
Mr Leighton: It does not work
like that. This is very straightforward. This is exactly the same.
The shares in the company go up with the value of the company,
in the same way that the shares on the Stock Exchange go up with
the performance of the company, and actually it is exactly the
same. They are all traded within the trust, so as far as our people
are concerned it is exactly the same as being outside but for
our purposes it is totally inside, it is within the trust, it
can never be sold outside the trust and can only be held for our
people, and they get a dividend too, so they get exactly the same
benefits. That is why—it is quite interesting listening
to everybody—this is so simple it is untrue. Actually, if
you go to the public they get it in one, they absolutely understand
it: "It is exactly the same as if I own a share anywhere
else, they are just traded within the company and I get a dividend.
I understand that. I get that." That is why it is very potent.
Q51 Chairman: A `dividend' I understand,
but how do you value these shares because they are not being traded?
Mr Leighton: In the same way as
you value the company. What happens is that, over a period of
time, if the company performs, as any other company performs,
you can determine a value for the company. The whole idea of this
is for the value of the company to increase because of its performance,
and there is a very simple piece of methodology, which is exactly
the same as you would use in how you value shares in the marketplace,
which gives you a value.
Q52 Chairman: Different shares have
wildly different "P" ratios on the Stock Exchange?
Mr Leighton: It does not matter.
Q53 Chairman: But how you chose that
ratio will determine the value of the company?
Mr Leighton: Yes, but you get
somebody outside, an independent, to do the valuation, in the
way as happens in the Stock Exchange.
Q54 Chairman: Yes, but the markets
have a way of attaching sentiment to valuation as well. This can
be a very mechanical process which will mean a there will be a
lot of challenge, will it not?
Mr Leighton: You say that, but
the thing about our markets, interestingly, is they might be wrong
in any one day, they might be wrong in any one week, but generally
over time they are right. So, sentiment counts for a period of
time, performance counts all of the time.
Q55 Chairman: If you make a loss
in any one year, what happens then to your employees and their
shares?
Mr Leighton: Exactly the same
thing. If you make a loss or your value does not go up, then clearly
the price of the shares goes down; so it is exactly same.
Q56 Chairman: That is the incentive
value you see for your staff?
Mr Leighton: Absolutely. We are
not planning on making a loss.
Q57 Mr Hoyle: But there is no liability?
Mr Leighton: Not at all. The one
piece of difference in this is there is no liability.
Q58 Chairman: Let us move on to the
other whole area. I would like to explore this at great length.
It fascinates me. I am not yet persuaded, but you might yet persuade
me. Let us move on to post offices. Tell us some factual stuff
first of all. How many post offices are there today in the network?
Mr Cook: 14,500.
Q59 Chairman: How many have you said
you would need to run a commercially viable network?
Mr Cook: A commercially viable
network would be around 4,000.
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